PROGRAM ON NEGOTIATION AT HARVARD LAW SCHOOL

AN INTER-UNIVERSITY CONSORTIUM TO IMPROVE THE THEORY AND PRACTICE OF CONFLICT RESOLUTION

BANKRUPTCY MULTIPARTY
NEGOTIATION SIMULATION

General Instructions

Three years ago, a company called NoDrink produced genetically modified soybean seeds, which
were sold to farmers who planted them in the state of Pablo. This soybean crop was harvested for
human consumption and found its way into a variety of consumer food products, ranging from soy
milk to soybean lecithin (an ingredient used in many popular chocolate snacks). These consumer
food products were sold to the general public in Pablo, although government regulation required that
all such products be designated as “GM” foods (an abbreviation for “genetically modified”) on the
products’ packaging. While no health warning ever accompanied the GM distinction, many Pablo
residents shied away from GM foods. Nevertheless, not everyone did so.

Recently, growing scientific evidence (including at least one robust study) suggests a link between
rising malignant stomach and throat cancer incidents among Pablo residents, as well as links to
benign tumor proliferation in the population. A number of Pablo residents filed suit against NoDrink
after the latest study on GM products was released. Some of these plaintiffs were suffering from the
aforementioned maladies, while others had no ill-health symptoms whatsoever. Some claimed,
however, to have consumed GM products in the past and have been worried about future health
problems and medical monitoring costs — scientific evidence implies that the latency period
between NoDrink soybean ingestion and adverse health conditions could be as long as a decade.

Although one of the largest suppliers of GM foods, NoDrink was not the only manufacturer of
“enhanced” soybeans, and does not believe its products are genuinely harmful — and even if they
are, NoDrink feels it would be unfair to place the entire blame for the population’s health problems
on this one company.. However, as a result of the bad publicity swirling around this controversy that
has made it almost impossible for NoDrink to continue to sell its products, the company had no
choice but to file for bankruptcy five days ago (with US$100B in assets at the time). Moreover,
because its soybean seeds have a very short shelf life, the value of NoDrink’s assets is plummeting
rapidly.

But perhaps there is some reason for hope: if NoDrink could emerge from bankruptcy, with a plan
that appears to the public to fairly compensate the injured parties, there is a chance the company can
survive. In fact, NoDrink has in the works a spray that the company claims can make its old soybean
seeds unquestionably safe, because the spray absorbs certain (suspected) carcinogens in the plant
matter, which can then be washed away with regular water. Laboratory tests on this spray have
yielded “very promising” results, a company representative told reporters yesterday.
This case was written by James Emerson with Ben Longoria, under the supervision of Professors Robert Mnookin and Lawrence Susskind. Copies are
available at reasonable cost from the Program on Negotiation Clearinghouse, and may be ordered online at www.pon.org or by telephone at 800-258-
4406 or fax at 617-495-7818. This case may not be reproduced, revised, or translated in whole or in part by any means without the written permission
of the Director of Curriculum Development, Program on Negotiation, Harvard Law School, 513 Pound Hall, Cambridge, MA 02138. Please help to
preserve the usefulness of this case by keeping it confidential. Copyright © 2003, 2005. Distributed with permission. All rights reserved. (rev. 8/05)
BANKRUPTCY MULTIPARTY NEGOTIATION SIMULATION: General Instructions 2

So far, the following classes of parties have filed claims against NoDrink, in the amounts shown
below:

Secured Creditors: $19B

Unsecured Creditors: $25B
Severely Harmed Tort Claimants: $45B
Slightly Harmed Tort Claimants: $30B
Possible Future Tort Claimants: $30B

Total amount claimed by creditors: $149B

Total value of company: $100B

All parties (tort claimants, and secured and unsecured creditors) are now going to have a chance to
negotiate with NoDrink as the company tries to formulate a reorganization plan, with the
understanding that until a reorganization plan is approved, NoDrink will hemorrhage value
according to the following asset-depreciation schedule:

Days (for us, minutes!) after negotiations begin: Amount of value lost at each milestone:

5 $2B
15 $4B
25 $8B
35 $16B
45 $32B

Note also that in the event that no bankruptcy plan is approved after 45 day-minutes, NoDrink will
not be able to reorganize under Chapter 11 of the Bankruptcy Code; instead, it will be liquidated in
accordance with Chapter 7 which will mean that all of its assets will be sold off in a fire sale — i.e.,
a public auction which typically yields low returns (because piecemeal assets generally have less
value than the collective assets of an entity that is a going concern). This would leave little for
NoDrink’s creditors and tort victims (in this case, $38B, to be divided among all of the creditors,
NOT necessarily apportioned equally).

Copyright © 2003, 2005. Distributed with permission. All rights reserved. (rev. 8/05)
 PROGRAM ON NEGOTIATION AT HARVARD LAW SCHOOL
AN INTER-UNIVERSITY CONSORTIUM TO IMPROVE THE THEORY AND PRACTICE OF CONFLICT RESOLUTION

BANKRUPTCY MULTIPARTY
NEGOTIATION SIMULATION

Student Handout: Negotiating in the Shadow of Bankruptcy

Impact of a debtor’s bankruptcy filing on negotiations

Automatic stay:

o All claim collection activities and litigation against the debtor-tortfeasor must be
suspended.

All claims must be filed:

o “File it or lose it” after general discharge of debts.

Future claims question:

o Definition of “claim” is incredibly broad:

Depends on bankruptcy/state law — when did you have a “right to

payment?”

o Better file your claim now.

Secured claims:

o Secured creditors hold security interests in specific assets of the debtor or, under
applicable state law, have obtained a judicial or statutory lien against the property of
the debtor. Because these creditors have an interest in specific property, they have
priority in repayment over general unsecured creditors and tort victims with respect
to the proceeds from the sale of those specific assets.

o But may be “under-secured.”

“Cram down”:

This case was written by James Emerson with Ben Longoria, under the supervision of Professors Robert Mnookin and Lawrence Susskind. Copies are
available at reasonable cost from the Program on Negotiation Clearinghouse, and may be ordered online at www.pon.org or by telephone at 800-258-
4406 or fax at 617-495-7818. This case may not be reproduced, revised, or translated in whole or in part by any means without the written permission
of the Director of Curriculum Development, Program on Negotiation, Harvard Law School, 513 Pound Hall, Cambridge, MA 02138. Please help to
preserve the usefulness of this case by keeping it confidential. Copyright © 2003, 2005. Distributed with permission. All rights reserved. (rev. 8/05)
BANKRUPTCY MULTIPARTY NEGOTIATION SIMULATION: Student Handout

o All individual classes of parties must vote and agree to a plan, UNLESS the
consenting party or parties “cram down” the dissenter(s):

At least one creditor must approve the plan, or it fails and the debtor will be
liquidated.

If a plan is not approved unanimously, then the plan which is approved must
give any and all dissenters at least as much value as they would have
received in a liquidation (i.e., “fire sale”) of the company’s assets. This may
not be much.

Judicial approval required:

o Judge must be convinced that a plan is “fair” and that it gives any dissenters at least
what they would have received in a liquidation. The plan must also be “feasible.”

Holdout problem dissenters must be “bought out”:

o “We’re going to push you over the edge!” versus “I’m going to jump!”

Copyright © 2003, 2005. Distributed with permission. All rights reserved. (rev. 8/05)
 PROGRAM ON NEGOTIATION AT HARVARD LAW SCHOOL
AN INTER-UNIVERSITY CONSORTIUM TO IMPROVE THE THEORY AND PRACTICE OF CONFLICT RESOLUTION

BANKRUPTCY MULTIPARTY
NEGOTIATION SIMULATION

Negotiation Summary Sheet

Was an agreement reached?

Yes No

If so, then fill out the rest of this sheet as described. If not, then fill out this sheet with respect to the
last offer that was on the table.

Was there a public apology?

Yes No

Briefly describe how tort claims will be satisfactorily proven before payment is made to a claimant:

________________________________________________________________________________

________________________________________________________________________________

________________________________________________________________________________

________________________________________________________________________________

________________________________________________________________________________

Who got how much in the end?

NoDrink, Inc.: _______

Secured Creditors: _______

Unsecured Creditors: _______

Severely Harmed Tort Claimants: _______

This case was written by James Emerson with Ben Longoria, under the supervision of Professors Robert Mnookin and Lawrence Susskind. Copies are
available at reasonable cost from the Program on Negotiation Clearinghouse, and may be ordered online at www.pon.org or by telephone at 800-258-
4406 or fax at 617-495-7818. This case may not be reproduced, revised, or translated in whole or in part by any means without the written permission
of the Director of Curriculum Development, Program on Negotiation, Harvard Law School, 513 Pound Hall, Cambridge, MA 02138. Please help to
preserve the usefulness of this case by keeping it confidential. Copyright © 2003, 2005. Distributed with permission. All rights reserved. (rev. 8/05)
BANKRUPTCY MULTIPARTY NEGOTIATION SIMULATION: Negotiation Summary Sheet 2

Slightly Harmed Tort Claimants: _______

Possible Future Tort Claimants: _______

Duration of plan:

3 years 5 years

Copyright © 2003, 2005. Distributed with permission. All rights reserved. (rev. 8/05)
 PROGRAM ON NEGOTIATION AT HARVARD LAW SCHOOL
AN INTER-UNIVERSITY CONSORTIUM TO IMPROVE THE THEORY AND PRACTICE OF CONFLICT RESOLUTION

BANKRUPTCY MULTIPARTY
NEGOTIATION SIMULATION

Confidential Instructions for: NoDrink, Inc.

Key Interests:

Stay in business:

o To stay in business, any bankruptcy plan you agree to must leave you with a
minimum of $25B in assets. However, you should try your best to hold onto much
more value. Sixty billion dollars in assets should be your target -- $50B will at least
keep you competitive in your industry.

o If you don’t agree to any plan, you will go out of business — your company will be
liquidated and your assets will be sold to pay off your debts — and you will be out of
a job.

o If your creditors won’t approve any plan giving you at least $25B so you can stay in
business, then you should consider stalling so the company is worth even less when it
is liquidated — in part, do so to spite the creditors who would delight in dining on
your corporate carcass. To increase your bargaining power, consider threatening to
let your company be liquidated.

Eliminate bogus claims and unnecessary medical monitoring costs:

o It is essential that you negotiate a “fair” mechanism for confirming the validity of the
claims brought against your company.

Determine how claims shall be proven by the parties supposedly injured by

your products and what sort of medical monitoring, if any, should be
conducted.

Set up a trust fund to pay a “fair” amount to those who may have future claims against you:

o Seek closure: try your absolute best to cap your future liability at the amount of the
trust fund.

This case was written by James Emerson with Ben Longoria, under the supervision of Professors Robert Mnookin and Lawrence Susskind. Copies are
available at reasonable cost from the Program on Negotiation Clearinghouse, and may be ordered online at www.pon.org or by telephone at 800-258-
4406 or fax at 617-495-7818. This case may not be reproduced, revised, or translated in whole or in part by any means without the written permission
of the Director of Curriculum Development, Program on Negotiation, Harvard Law School, 513 Pound Hall, Cambridge, MA 02138. Please help to
preserve the usefulness of this case by keeping it confidential. Copyright © 2003, 2005. Distributed with permission. All rights reserved. (rev. 8/05)
BANKRUPTCY MULTIPARTY NEGOTIATION SIMULATION: NoDrink, Inc. 2

o Also keep in mind that (1) many future ailments may never materialize; and (2)
bankruptcy’s automatic stay means that all tort litigation has been suspended — and
if no plan is approved, while the litigation may continue, it will take time and money
to try a case in court. Moreover, there is no guarantee a plaintiff would ultimately
win the case. And even if victory is achieved, a plaintiff will be treated like any
other unsecured creditor when trying to collect from your company in case of a
liquidation.

Additional Interests:

Avoid public apologies (if at all possible) as these can harm future business prospects — try
instead, to settle all tort claims in the plan with a disclaimer of “no responsibility” for the
injuries alleged.

Your unsecured creditors seem to have padded their labor bills significantly. Don’t pay them
for work they never actually performed, or didn’t do well in the first place!

Payment Timing:

Normally, bankruptcy debt repayment plans last three years. However, occasionally courts
will permit plans that provide for payments to creditors for up to five years. If necessary to
get plan approval so that your company stays alive, you can promise to pay back slightly
more than the value of your assets at the time of your agreement by making extra payments
to your creditors during that additional two-year period . But to do this, you will need to
take money out of your anticipated profits to pay one or more of your creditors. Also, if
necessary, you can sell certain assets right away to come up with a maximum of $10B in cash
for an immediate payment to your creditors.

Copyright © 2003, 2005. Distributed with permission. All rights reserved. (rev. 8/05)